Oil price plunge is credit negative for banks in Russia, Kazakhstan and Azerbaijan, says Moody’s

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Plunging oil prices this year are credit negative for banks in the oil-exporting countries of the Commonwealth of Independent States (CIS) – Azerbaijan, Kazakhstan and Russia – by threatening their capital and profitability, Moody’s Investors Service said in a report published Thursday.

“If economic conditions continue to worsen, banks’ asset quality will materially deteriorate,” said Olga Ulyanova, VP-Senior Credit Officer at Moody’s.

“Also, net interest margins will narrow as funding costs increase as a result of banks’ efforts to prevent deposits outflows amid a potential massive conversion of local currency deposits into foreign currency and, in some cases, central banks’ hikes of interest rates to stem inflation stocked by currency depreciation.”

Brent crude oil prices dropped from an average of US$64 per barrel in 2019 to US$25.5 per barrel as of 18 March 2020, the lowest since 2003. The oil price plunge has triggered a weakening of major oil exporters’ local currencies.

This is weakening the three countries’ local currencies, eroding capital adequacy of banks with large foreign currency assets.

The Russian rouble fell 23% against the US dollar this year to 18 March. The Kazakh tenge depreciated 14% during the period. The Azeri manat has been stable thanks to foreign-currency sales by the state oil fund. However, if oil prices stay at current record low levels for a prolonged period, the Azeri government will face significant pressure to devalue its currency.

Even so, the banks are less vulnerable now than during the 2014-15 crisis. Since then, tighter regulations, and improved risk management and credit underwriting have increased banks’ liquidity and capital buffers and decreased their dollarisation, making them less vulnerable to oil price shocks.